European policymakers are meeting this week but are unlikely to announce any new initiatives after their June meeting saw interest rates slashed from 0.25 per cent to 0.15 per cent in an effort to revive the continent's moribund economy.

The pound continued to strengthen against the US dollar, with sterling once more registering its highest level since October 2008, at 1.71.

The biggest fall in the FTSE 100 Index came from easyJet as shares in the airline continue to slip back from the recent high seen in April.

A downgrade from Bank of America Merrill Lynch caused the latest sell-off, with the broker cutting its recommendation to underperform and lowering its price target to 1150p from 1800p.

The sector has been spooked by an upward trend for fuel costs and a recent profits warning from Lufthansa in which it warned about the impact on fares from overcapacity on its European routes.

Shares were 94p lower at 1365p, while rival International Airlines Group was 13.3p lower at 370.5p.Elsewhere on the fallers board, shares in Sports Direct International were down more than 2 per cent - off 17p to 706.5p - after it was forced to deny that it planned a takeover offer for shoe retailer Office.

The FTSE 100-listed chain is also thought to be facing defeat by shareholders over a third attempt to secure a bonus scheme for founder Mike Ashley.

It was a mixed day for the retail sector, with Debenhams ahead 1.2p to 68.5p but SuperGroup down 12p to 1056p in the FTSE 250 Index.

Marks & Spencer also fell 6.7p to 425.2p after broker Shore Capital warned that next week's trading update from the chain was unlikely to show a shift in momentum in the company's turnaround plans.

The biggest risers on the FTSE 100 were Fresnillo up 17p at 872p, Pearson up 19p at 1154p, Aberdeen Asset Management up 6.5p at 453.9p and Rexam up 7.5p at 535p.

The biggest fallers on the FTSE 100 were easyJet down 94p at 1365p, International Airlines Group down 13.3p at 370.5p, Sports Direct International down 17p at 706.5p and Hargreaves Lansdown down 24p at 1238p

15.30: The Footsie stayed weak in late afternoon trade but came off session lows as US stocks posted a modest early rally after opening falls with investors digesting another mixed bag of economic data.

With an hour of trading to go, the FTSE 100 index was down 11.3 points at 6,746.5, having hit a low of 6,73543 after reversing from a morning peak of 6,777.11.

In early trade on Wall Street, the blue chip Dow Jones Industrial Average recovered from an opening dip to add 3.8 points at 16,855.6, while the broader S&P 500 index was up 2.2 points at 1,963.2.

Cautious rally: US stocks recovered from opening falls but the Footsie stayed weak with key US jobs data and an ECB rate decision due on Thursday.

After a recent run of weak economic data, investors took some heart from news that US pending home sales jumped 6.1 per cent in May to reach the highest level in eight months, with an index reading of 103.9, compared with 97.9 in April, the National Association of Realtors (NAR) said.

However, countering this was news the closely-watched Chicago purchasing managers index fell to 62.6 in June after hitting a seven-month high reading of 65.5 in May, below the consensus forecast of 64.3.

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Overall, trading looks set to be cautious this week, with US markets closed on Friday for the Independence Day holiday and as a result the key US June jobs report to be released on Thursday, the same day as a rate decision by the European Central Bank (ECB).

Marc Oswald, strategist at Monument Securities said: ‘Forecasts for US labour data look to have a lack of any real conviction, given that most metrics are seen 'violently' unchanged from June levels, except for yr/yr Average Hourly Earnings, where base effects are expected to drive a fall to 1.9 per cent from 2.1 per cent.'

He added: ‘As for the ECB, last month's raft of measures, which have a timetable which stretches far into the future, preclude any new policy measures, and recent data suggests that the balance of risks on growth and inflation should also be unchanged.’

13.00: The Footsie dropped back in lunchtime trading, giving back all the morning’s modest gains as homebuilders went into reverse after last week’s rally impacted by some negative broker comment on the outlook for the UK housing market.

By mid session, the FTSE 100 index was down 17.2 points at 6,740.6, near its low for the day having reached a high of 6,777.11.

On currency markets, the pound also edged lower against both the euro and dollar after Bank of England data showed signs that tighter rules on UK mortgage lending were starting to have an effect even before last week’s action by the Bank’s Financial Policy Committee (FPC), lessening the impetus for the BoE to raise interest rates sooner than expected.

Housebuilders reverse: Persimmon was a blue chip faller as the housebuilding sector gave back some of last week's gains hit by some cautious broker comment.

Martin Beck, senior economic advisor to the EY ITEM Club said: ‘Although mortgage lending picked up a touch, it continues to remain well below the levels seen typically prior to the financial crisis.

‘Recent signs of a cooling in the housing market look like they could be more than just a flash in the pan arising from the implementation of the Mortgage Market Review in April.

‘In that respect the relatively modest action taken by the FPC last week to guard against risks arising from an unsustainable housing boom may prove to have been a good call,’ Beck added.

However, despite this possible rate rise reprieve, housebuilders were a weak spot today on concerns that the UK housing bubble might be about to deflate, with the sector having been supported last week by the fairly benign FPC moves to curb bigger, riskier mortgage lending.

Broker Westhouse Securities said it sees downside risks in the housing sector and advised investors to switch their preference from housebuilders and estate agents to contractors, especially highlighting ground engineer Kier Group – up 2.5p to 1,766.5p.

The broker said housebuilders are faced with the potential for tougher regulation, in particular tighter lending as threatened by chancellor George Osborne in his Mansion House speech on June 12.

Westhouse analysts said in a note: ‘We are hearing increasing anecdotal evidence that the London housing market has already started to turn, with estate agents suggesting there have been fewer viewings and offers, as well as lengthening transaction times and some price reductions.’

Among the residual blue chip gainers, drug maker Shire added 3p to 4.573p on continuing US bid hopes and after a tax boost from Canada.

Press reports suggested that the CEO of potential bidder AbbVie was jetting into London this week to press the US firm’s rejected $46billion takeover bid, and at the same time Dublin-based Shire has been told it is entitled to a $410million tax credit from the Canadian authorities.

In other bid interest, drinks group Diageo jumped 24.5p higher to 1,872p on recent talk it could merge with brewing rival SAB Miller, which has in the past been linked with a possible takeover by European-listed peer ABInbev, SABMIller shares were also in demand, up 21.5p to 3,387.5p.

And mobile telecoms group Vodafone ticked 0.2p higher to 196.5p as broker Oriel Securities upgraded its rating ‘cautiously’ to a hold from reduce with a number of uncertainties still ahead for the firm.

The broker said in a note: ‘We have at least two more tough quarters ahead, according to Vodafone. So 'hold', but also be very vigilant.’

Away from the blue chips, recently floated online appliances retailer AO World shed 9.3p to 261.9p as broker Shore Capital started coverage of the stock with a sell rating, saying the shares would be overvalued even if it sold every domestic appliance in the UK.

10.15: The Footsie held on to modest gains as the morning session progressed, with a rise from drugs sector bid target Shire helping offset falls in heavyweight miners and airline stocks.

By mid morning, the FTSE 100 index was up 7.2 points at 6,764.9, just above the session low of 6.756.21 having drifted back from an early session peak of 6,777.11.

Euro zone inflation in June was flat, official data showed, easing the immediate pressure on the ECB to act again to tackle slow price rises following this month’s move to slash some interest rates to below zero and introduce a package of economic stimulus measures.

The year-on-year June inflation rate in the 18 countries sharing the euro stood at 0.5 per cent for the second month in a row, the European Union's statistics office Eurostat said.

It was the ninth straight month that inflation remained within what European Central Bank President Mario Draghi has called a ‘danger zone’ of below 1 per cent.

Meanwhile, with an early interest rate hike on the agenda for the domestic economy as the Bank of England frets over ways to cool the booming UK housing markets, data today showed that maybe recent moves to tighten mortgage lending criteria might be having an impact.

British lenders approved the lowest number of mortgages last month since June 2013, in a further sign that tighter mortgage affordability rules introduced in April are dampening activity.

The Bank of England said mortgage approvals for house purchase numbered 61,707 in May, down from 62,806 in April - a marginally smaller drop than economists had forecast but still the lowest reading in 11 months.

Similar figures last week from the British Bankers' Association had shown the lowest number of approvals since August 2013. However there is strong growth in net mortgage lending in May, reflecting past mortgage approvals and rising house prices.

Mortgage lending rose by a stronger-than-expected 1.988 billion pounds in May, its biggest increase since July 2008, and in the three months to May it rose at an annualised rate of 1.7 percent, its fastest growth rate since September 2008.

Howard Archer, chief European and UK economist at IHS Global said: ‘It is now very clear that the introduction of new regulations under the Mortgage Market Review (MMR) has - at least temporarily - taken some of the steam out of housing market activity.’

He added: ‘There are also some signs (such as in the May RICS survey and the June Hometrack survey) that buyer interest has recently come off its highs.’

However, Archer said: ‘It remains to be seen whether this loss of momentum in housing market activity is lasting, and whether it significantly dilutes the recent marked upward pressure on house prices.’

British house prices have risen by 10 per cent in the past year, with London prices rising almost double this, and the Bank has said it is increasingly concerned about rising indebtedness.

Last week BoE Governor Mark Carney announced measures to curb rising debt and allow wages to catch up with house prices.

Drugmaker Shire was a top blue chip gainer today, adding 57p at 4,627pThe biggest rise after the firm announced its Canadian arm has received a tax refund worth £241million from the country's revenue authorities.

The stock also rose as it was reported that the boss of potential US suitor AbbVie was due to fly to London this week to consider the next move in his pursuit of the Dublin-based firm.

Miner Anglo American was also a gainer, up 1p to 1,432p after The Sunday Times said the company has put some of its South African platinum mines up for sale as part of a plan to sell off $4bn of its underperforming assets.

But other mining stocks came under pressure as metal prices declined across the board after a recent rally, with BHP Billiton the top FTSE faller, down 24.5p to 1,889p, while Rio Tinto shed 13.5p at 3,190.5p.

Low-cost airline EasyJet was also a big faller, down over 5 per cent or 76p to 1,383p after broker Bank of America Merrill Lynch downgraded its rating to underperform from neutral. Irish rival Ryanair was upgraded to neutral by the same broker.

Elsewhere on the fallers board, shares in Sports Direct International fell 10.7p to 712.7p after the firm denied that it planned making an offer for shoe retailer Office.

The stock also suffered as the group is thought to be facing defeat by shareholders over a third attempt to secure a bonus scheme for founder Mike Ashley.

Among the small caps, media firm Mecom Group soared 32 per cent higher, up 37.7p to 152.7p after it agreed to be acquired by Belgian media group De Persgroep for £196million in cash, valuing each Mecom share at 155p.

08.30: The Footsie pushed higher in early trade this morning, extending Friday’s strong gains with investors still positive a the end of a volatile month ahead of a busy week for economic news, with the European Central Bank rate decision and US June jobs report on both due on Thursday.

In opening deals, the FTSE 100 index was 15.8 points higher at 6,773.6. The UK blue chip index closed 0.3 per cent or 22.65 points higher on Friday, although it posted a 1 per cent drop for the week.

Craig Erlam, market analyst at Alpari (UK) said: ‘Ordinarily, we can expect to see a little caution from traders in the early part of the week, with many of these events coming later on, but that doesn't appear to be the case.’

Centre stage: The European Central Bank this meeting will be a big focus later this week, with Euro zone inflation numbers to be eyed today for deflationary implications,

He said: ‘One reason for this is that Thursday's monetary policy decision from the ECB is unlikely to include a change in stance following last months all out assault of stimulus measures.

‘While the ECB still has quantitative easing left as an option, it's likely to give the other stimulus measures a chance first before being forced to utilise the one policy option that has proven to work but it is most reluctant to adopt. With that in mind, we're probably looking at the end of this year at the earliest.’

The main economic focus today will be on the latest Euro zone CPI inflation numbers, due at 10 am, with the threat of deflation having been a primary factor behind the ECB easing this month.

Erlam said: ‘Given that they finally succumbed to the pressure last month, meaning any further action is unlikely any time soon, and that this action is unlikely to be see in the June reading, I don't expect to see the same kind of reaction to today's figure.

‘That said, should we see another significant drop towards the deflationary levels, the ECB would likely come under pressure to do more once again, regardless of the position taken last month.’

On the domestic front, Bank of England mortgage lending and consumer credit data for May will be released at 9.30am and these are expected to show the first official impact of the Mortgage Market Review tightening on lending criteria.

A slowdown in the mortgage market has been seen as possibly putting a brake on the booming UK housing market, particularly after the Bank’s Financial Policy Committee introduced other measures designed to curb bigger, riskier loan lending last week.

But the BoE remains concerned about the impact of the housing boom on the strengthening UK economy and continues to be poised to hike UK interest rates from current record low levels, perhaps by as early as the end of this year.

The UK base rate is likely to return to 5 per cent within a decade, according to the outgoing Bank of England deputy governor. Sir Charlie Bean said it would be 'reasonable' to expect borrowing costs to return to pre-recession levels in the long term - between five to 10 years.

The prediction will spark interest after Governor Mark Carney this week said 2.5 per cent would be the 'new normal' for interest rates three years from now - rather than the historically 'normal' level of 5 per cent.

Stocks to watch include:

BAE SYSTEMS - Europe's biggest defence contractor said it would reorganise its interests in Saudi Arabia into one company to enhance its relationship with Riyadh Wings, its partner there.

SHIRE – The drugmaker, which is being pursued by US rival AbbVie in a $46 billion takeover attempt, has received a $248million cash refund from the Canadian revenue authorities. The boss of AbbVie is flying into London this week to court Shire's shareholders and try to convince them of the merits of a potential takeover, the Daily Telegraph reported.

UNILEVER - Male hair grooming product Brylcreem has been put up for sale by Unilever in the Anglo-Dutch company's next stage in streamlining its portfolio of brands, the Sunday Telegraph said.

ANGLO AMERICAN - The global miner has put some of its platinum mines in South Africa up for sale in a move by Chief Executive Mark Cutifani to dispose of underperforming assets, the Sunday Times reported.

BARCLAYS - The bank has hired lawyers from the high-profile firm Wilmer Cutler Pickering Hale and Dorr to help the bank defend itself against US accusations that it deceived investors in its ‘dark pool’ trading platform, according to people familiar with the matter. Also, Barclays has shifted the head of its equities electronic trading unit out of his day-to-day roles so that he can focus on the internal investigation into the dark pool scandal, a person familiar with the situation said.

GLAXOSMITHKLINE – The drugmaker on Sunday confirmed the existence of an intimate video recording of its former China head, Mark Reilly, which the Sunday Times reported kicked off a bribery investigation that has damaged the drugmaker's business in China. Also, GlaxoSmithKline and Genmab said their cancer drug Arzerra failed to treat a type of leukemia more effectively than other drugs in a late-stage trial.

BP – The oil major has asked a U. judge to direct what it called a ‘vast number’ of businesses to repay hundreds of millions of dollars it says were wrongly awarded as compensation on claims stemming from the 2010 Gulf of Mexico oil spill.

BG GROUP - The partners in Israel's giant Leviathan natural gas field said they had signed a preliminary agreement with the British oil and gas company to negotiate a deal to export gas to BG's liquefied natural gas plant in Idku, Egypt.